Dissolution on just and equitable grounds

The Partnership Act 1890 gives the court a wide jurisdiction under section 35(f) to dissolve a partnership at its discretion under what is “just and equitable”. In Atwood v Maude373, the court commented that where a working relationship requires a significant degree of “mutual confidence”374

, there should be a remedy to dissolve the company on the grounds of what is just and equitable if there is a loss of mutual trust between the partners. Implicit in the Act is that 35(f) is usually only used as grounds for dissolution when (b), (c) and (d) cannot apply375. Situations which might be included under section 35(f) are other than those mentioned in section 35(b), (c) and (d) include: i) uncooperative behaviour, ii) loss of confidence or iii) wrongful exclusion of a partner all examples of what might make a case come under section 35(f): i) The court will be likely to examine the uncooperative conduct of the partners. The court will decide irrespective of blame, or whether the partnership was solvent at the time, whether or not to dissolve the partnership. In Re Yenidje Tobacco Company Ltd376, the court held that partners who refused to meet made the business unworkable and the court gave the order to dissolve the partnership. One example was a secretary who refused to enter a resolution of the firm into the minutes.377 Similarly, in Khurll v Poulter378, the defendant’s conduct was deemed to make the business, a property development company, unworkable.

373

Atwood v Maude (1867-68) L.R. 3 Ch. App.369

374

Ibid,at 373

375 _{Hardy Ivamy,E.R,Underhill’s Principles of the Law of Partnership, (London: Butterworths, 12}th _ed,

1986), p.84

376 _{[1916] 2 Ch 426} 377

Re Yenidje Tobacco Company Ltd [1916] 2 Ch 426 at 428

378

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The breakdown cannot be the result of a passive situation: there needs to be conduct of some kind which has led to the breakdown.

ii) Loss of confidence between partners may develop even when there is no uncooperativeness at work but there is a breakdown of mutual trust. This can happen as a result of the mental illness of a partner, and need not involve any hostility379. There must be evidence of the loss of confidence for a petition for dissolution to succeed. The judge in Lauffer v Barking380 remarked that a defendant's submissions concerning whether the partnership is unworkable depends upon the evidence upon which the defendant relies being accepted”381. The evidence is not linked to who is to blame; in Harrison v Tennant382, neither of the partners was held to be free of blame383. Furthermore, the conflict between the partners need not be extreme to become unworkable384. In Lie v Mohile385, the appellant contended that he wanted the defendant expelled, as he would have the advantage of taking the tenancy of the work premises for himself. The partners, GPs in a two-man practice, had only been communicating on medical matters by e-mail and were not coping well administratively under the strain of the non-communication between them. On the facts of the case, there was no place for the appellant to make a claim for repudiation of contract when, at the time of the appeal, the correct mechanism to use was dissolution on the basis of section 35(f)386.

379

Besch v Frolich (1842) 1 Phillips 172, at 173

380

[2009] EWHC 2360 (QB)

381

Lauffer v Barking [2009] EWHC 2360 (QB) at para 48

382 _{(1856) 21 Beavan 482} 383

Harrison v Tennant (1856) 21 Beavan 482,at 496

384 _{Blackett-Ord M., Partnership Law, (Sussex : Tottel, 3}rd _{ed, 2007), p.382.} 385

Lie v Mohile [2015] EWHC 200 (Ch)

386

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iii) The wrongful exclusion of a partner may prompt a court to order immediate dissolution. In Thakrar v Vadera387 the act of serving notice on another partner, effectively expelling him from the partnership constituted conduct meriting dissolution. In Re Davis & Collett Ltd388 the circumstances were less extreme. The judge commented in his ruling that ejecting a partner from his room and thus treated him as a person irrelevant to the company’s management389 warranted dissolution of the firm on just and equitable grounds.

Any partner may apply for dissolution under 35(f) unless the petitioner seeks to gain unduly from an ulterior motive. In J.E. Cade & Son Ltd.,390 the court refused a petition on just and equitable grounds when the petitioner would gain a greater protection of interests thereby391. Similarly, a petitioner guilty of misconduct will not usually to be allowed to petition under 35(f) based on the principle in equity that one who seeks an equitable remedy must come with clean hands392. However, an equitable remedy will only be refused to a petitioner who is the sole partner guilty of the misconduct which has brought about the breakdown in relations. In Golstein v Bishop393 the judges declared per curiam394 that some cases are better brought for equitable remedy. In Golstein v Bishop the sole party guilty of misconduct was the defendant. Thus, the judges’ statement does not contradict the equitable principle of coming with clean hands before the court for an equitable remedy. Whereas the equitable principle of coming with clean hands will prevent the application for a judgment

387 _{Unreported. 31.3.1999, as quoted in R. C. Banks, Lindley & Banks on Partnership, (London: Sweet &}

Maxwell, 19th ed, 2010), p.835

388

[1935] Ch 692

389

Re Davis & Collett Ltd [1935] Ch 692, at 702

390 _{[1991] BCC 360} 391

J.E. Cade & Son Ltd. [1991] BCC 360, at 361

392 _{Blackett-Ord M., Partnership Law, (Sussex: Tottel, 3}rd _{ed, 2007), p. 382, para 17.25 footnote no. 1} 393

[2014] Ch 455

394

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under 35(f), there are no consistent standards to help determine which cases deserve to be heard under that subsection; this is left to the mind of the individual judge who cannot be held out as an expert at all in every type of case requiring the exercise of discretion395.Therefore, in the opinion of this author, specific standards are needed to guide courts in deciding which cases should be heard under 35(f) and how far discretion can be taken in particular circumstances, especially due to the fluid nature of discretionary decisions. As judges apply and interpret, but cannot make new law, it would fall to Parliament to legislate for the setting of those standards through the issuance of a statutory instrument. All that would be required is the mirroring of the principles exercised by judges in equity, whose principles arise out of common law, when applying discretion in other areas, such as decisions under 35(f), so that discretion is not, in relation to equity, “open-ended” as critics have pointed out396. Naturally, the imposition of rules for discretion by Parliament would seriously interfere in the freedom of judges to apply that discretion. Therefore, the challenge will lie in how to extract guiding principles from a very widely and imprecisely principled body of common law such as discretional decisions based on just and equitable considerations. Perhaps some broad categories not dissimilar to that which already exists in the form of maxims in equity will suffice to provide similar guidelines to reign in discretion from being open- ended, and endow judicial discretion with a framework which is neither rigid not fluid, but flexible. The proposal in this thesis for standard rules limiting the

395 _{Matthias Klatt [Taking Rights Less Seriously: A Structural Analysis of Judicial Discretion], Ratio Juris,}

Vol.20, No.4, December 2007 (pp.506-529), at p.527.

396 _{Neil Guthrie, [Equity isn’t just the exercise of judicial discretion], August 13 2013, Lexology, Accessed}

at: http://www.lexology.com/library/detail.aspx?g=ad0e8390-58d1-42d7-8daf-f65faf0528f0, Accessed on: 27.05.2015

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application of court discretion will endow the legal process leading to dissolution with greater clarity as to its probable outcome397.

A final point for consideration under this heading is that the various subsections of section 35(b) to (e) seem to overlap. For instance, the case of Baring v Dix398 dissolution could, on the facts of the case, occur under section 35(f) rather than section 35(e). Contrast how Lindley399 presumes Baring v Dix400 to be a case of dissolution only under section 35(e) while Milman and Flanagan401 consider how the same case could have come under section 35(f). A problem with this is that the court will consider the grounds for dissolution was brought. The court will dismiss the case if the claimant asks the court to dissolve a partnership if he has chosen incorrect subsection in section 35 of Partnership Act 1890 even if the claimant has right to dissolve the partnership under this section but under different subsection. This exactly what happened in the decision in Moore v Moore402 where to the claimant brought a claim to dissolve a partnership between him and his father under section 35(c), (b) or (f). Simon Monty QC pointed out that on the facts of the case the partnership was for the joint lives of the partners and could not be dissolved in respect to the reasons for dissolution brought by the claimant. However, he pointed out that had the claimant brought his claim for dissolution on grounds of incapacity, he would have made an order for its dissolution403. This would have been achieved under the Mental Capacity Act 2005 section 18(e). Thus, a petition to dissolve brought under a subsection

397 _{The matter of standards for court discretion is only briefly highlighted here as analysis in any further}

depth is outside the scope of this thesis and would be more appropriate to revisit in a future study, as pointed out in my concluding chapter 6.4

398

(1786) 1 Cox 213

399 _{R. C. Banks, Lindley & Banks on Partnership, (London: Sweet & Maxwell, 19}th _{ed, 2010), p.832.} 400

(1786) 1 Cox 213

401_{Milman, D., and Flanagan, T., Modern Partnership Law, (London: Croom Helm, 1983), p.122} 402

[2016] EWHC 2202 (Ch)

403

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may result, on a technicality, in an unfavourable outcome, waste a time, make courts busy and prolong litigation. Especially that distinguish of differences between subsections is subjective and it may mislead specialists experts so what do you think about others. Therefore, it would be far better were all the subsections under section 35 merged into one paragraph and include mental incapacity, thus:

Section 35(a) When a partner becomes permanently incapable, or guilty of misconduct; breach of partnership agreement or whether the business can only be carried on at loss, or whenever there are any circumstances have arisen which, in the opinion of the Court, render it just and equitable that the partnership be dissolved;

(b) Any partner can petition to dissolve the partnership unless the petitioner is the partner in breach of the agreement and is solely the guilty party in respect of the misconduct complained of.

A further advantage in redrafting the law is that a merged section would give a greater choice of alternatives to the judge to use at his discretion to remedy the situation before him.